Thank you for standing by, and welcome to the Cohu Incorporated Second Quarter 2020 Financial Results Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised today’s conference is being recorded. [Operator Instructions] I'd now like to hand the conference over to your speaker today, Mr. Jeff Jones. Thank you. Please go ahead, sir.

Thank you and good morning and welcome to our conference call to discuss Cohu's second quarter results and third quarter 2020 outlook. I'm joined today by our President and CEO, Luis Müller. If you need a copy of our earnings release, you may access it from our website at cohu.com or by contacting Cohu Investor Relations. There’s also a slide presentation in conjunction with today's call that may be accessed on Cohu's website in the Investor Relations section. Replays of this call will be available via the same page after the call concludes. Now to the Safe Harbor. During today’s call, we will make forward-looking statements reflecting management’s current expectations concerning Cohu’s future business. These statements are based on current information that we have assessed, which by its nature is subject to rapid and even abrupt changes. We encourage you to review the forward-looking statements section of the slide presentation and the earnings release, as well as Cohu’s filings with the SEC, including the most recently filed Form 10-K and Form 10-Q. Our comments speak only as of today, July 30, 2020 and Cohu assumes no obligation to update these statements for developments occurring after this call. Finally, during this call, we will discuss certain non-GAAP financial measures. Please refer to our earnings release and slide presentation for reconciliations to the most comparable GAAP measures. Now I’d like to turn the call over to Luis Müller, Cohu’s President and CEO. Luis? Luis Müller: Thanks, Jeff. Hello everyone and thanks for joining us. Today, I'll discuss some of our accomplishments in the second quarter and provide our perspective for the rest of the year. Jeff will later discuss financial results and provide guidance for the third quarter. Sales in the second quarter were approximately $144 million and a little better than…

Thanks Luis. Cohu executed well during Q2. Sales were higher than the midpoint of our guidance. Gross margin was also higher than our guidance. Operating expenses were lower than forecast, due to tight control of spending and Q2 non-GAAP profitability was our highest since Q4 of 2018. Now, before I walk through the balance of the Q2 results and the Q3 guidance, let me talk about our GAAP to non-GAAP adjustments. Please note that, my comments that follow, I'll refer to non-GAAP figures. For GAAP to non-GAAP reconciliations and disclosures see the accompanying earnings release and investor presentation. For Q2, the GAAP to non-GAAP adjustments, include approximately $3.4 million of stock-based compensation expense; intangible amortization expense was approximately $9.5 million; and restructuring costs, primarily driven by the Xcerra acquisition were approximately $700,000. Now turning to Q2 results. Revenue was $144.1 million and $1.6 million higher than the midpoint of guidance. In Q2, no customer accounted for 10% or more of sales. In the second quarter, Cohu's gross margin was 42.5% and higher than our guidance from better-than-anticipated utilization of our Asia factories. The Q2 gross margin is in line with our business model. Operating expenses were $47.9 million, and $1 million lower than forecast. Temporary cost reductions remain in effect. Second quarter non-GAAP operating income was 9.3% of sales and adjusted EBITDA was 11.3%. The Cohu's non-GAAP effective tax rate for Q2 was 23.2% lower than guidance, primarily as a result of tax benefits derived from operating losses generated in Germany. Non-GAAP EPS for the second quarter was $0.17. Now turning to the business model. As of the end of fiscal 2019, we completed the actions required to achieve the $40 million of acquisition cost synergies. As we announced at the end of March we implemented temporary salary reductions, which…

[Operator Instructions] And your first question comes from the line of Quinn Bolton from Needham & Company. Your line is now open.

Hey, guys. Congratulations on the results and outlook. I guess, I just wanted to come back to the sort of second half outlook. I think last quarter you had expected a sort of slower third quarter on slowing RF test and an improvement in the fourth quarter. Now, it kind of feels like Q3 is better, but maybe Q4 is tempered a little bit. Do you just think that some of the revenue you thought you would – previously, you've seen in the fourth quarter has been pulled into the third quarter, or how should we think about sort of the change in dynamics between the third quarter and the fourth quarter compared to what you thought a quarter ago? Luis Müller: Quinn, this is Luis. In reality, what we've seen is the mobility customers coming in faster – a little faster than we originally anticipated in the third quarter, and that's what we're seeing here. We have limited visibility out to fourth quarter. So we don't think this is a pull-in from fourth quarter to third quarter, and that's why we say fourth quarter could still be flat to slightly up slightly down. It's difficult to say, but we're viewing it approximately the same at this time. We'll obviously know more as this quarter progresses. But at this point, it's not necessarily a pull in. It's more of a earlier Q3 ramp than we had expected when we're out in May – talking about this in May.

Great. And then a follow-up question. Just – I know the automotive business has been slow. But that's an important segment for you. Your best guess today when do you think you start to see perhaps better demand conditions from the automotive customers? Luis Müller: We're very encouraged actually by seeing the earnings release here over the last week from many of our customers in the automotive space. So we see them have turned the corner they're guiding – many of them are actually guiding up quarter-on-quarter. So that's very encouraging. It's a matter now of watching that test cell utilization. As I said, on average, we're at about 78% today. It's obviously stronger at the mobility customers and a bit weaker more in the lower 70s at the automotive customers. So we're watching that test utilization and seeing as it creeps up that it will be the turning point. It's difficult to say whether we're talking late Q4, mid Q1. It's really hard to say and pinpoint that exactly Quinn. But we do see our customers moving up on the automotive space. So we're encouraged by it. We just don't know the exact timing.

Great. And last question. If I heard you right, Luis, I think you said the contactor attach rate was 44% in the June quarter, if that's right. I think it's jumped up almost 10 basis -- or sort of 10 points quarter-on-quarter. Did I hear you correctly? And if I did what is -- what do you attribute that higher attach rate to? Is it just some of the programs you've been working on now for a couple of years have started to go into production, or is there mix shift going on that's driving that higher attach rate? Just any more color you could provide would be helpful. Thank you. Luis Müller: Sure. You are correct. It did jump up to 44% in the quarter. There are a couple of reasons for that. One is we did indeed see some traction particularly with the new design wins on the handler side we were able to bundle the contactor as part of the product proposal to the customers. So that actually drove an increase in attachment rate. At the same time, I do have to caution that number will fluctuate a bit quarter-on-quarter depending on handler sales and which customers are driving the handler sales in that particular quarter. So I wouldn't be surprised to see that number jump up and down a little bit on a quarter-to-quarter basis. I think you may have to take this number over a longer period of time and see the moving average.

Understood. Thank you. Luis Müller: You're welcome.

And your next question comes from the line of Krish Sankar from Cowen & Company. Your line is now open.

Hi. Thanks for taking my question. This is Steve calling on behalf of Krish. Luis, if I can ask on the strength that you're seeing in mobility currently. I just want to drill down a little more on some of the product strength -- demand strength in 5G. So just with the more complex signaling for the 5G bands compared to 4G you have MIMO there's antenna package type modules. And also ultra-wide band signals potentially there being tested as well. Can you provide some more color in terms of the 5G opportunity today that is ramping? We're still in the first year of 5G. If you can compare it to 4G back in the day. If you go back that far, how much stronger is the ramp this year -- this time around for 5G-based on the technology and the complexity of it? And then -- and how much of the strength is just based purely on the capacity pull-ins or strength that you were citing earlier? Luis Müller: Hi. Yes, it's a bit of a challenge for me to do that comparison on the tester side because when 4G ramped, we didn't own tester assets semiconductor tester assets, right? We're predominantly supplying handlers at that point in time. But to your point on the tester side, we're still in the early stages of 5G obviously. You're looking at less than 15% of all cell phone, smartphones coming out this year having embedded 5G technology. And I think what it's interesting and I don't know how it compares to 4G. But what I think is quite interesting is that with 5G, the frequencies are jumping up significantly. And so with that is the complexity of signal fidelity all the way to device under test. So it does create a really good opportunity for us to combine our testers, our contactors, particularly our testers and our contactors and to some degree our handlers and offering an integrated solution to customers that accelerates their time to volume production. So you don't have to rely on the customer or their expertise to bring together pieces of equipment to perform one function which is test. We bring to the table a complete ironed-out ready to go ready to ramp in production solution. And so we're seeing many of our customers appreciate that value of the integration as well as the value of the test applications team for these highly complex, high-frequency RF devices. And I think that's -- that opportunity is going to continue to open up new doors for Cohu in the coming quarters. And that's why I said, I hope to talk to you more in the coming quarters about the cross-selling and the full test cell.

That's very helpful. And as my follow-up, I just had a question on gross margin profile relative to the end market mix. So as -- or once automotive starts to recover here, hopefully in the coming quarters, what would be the general impact of greater automotive sales to margins? Is it a richer mix, or compared to where you're guiding for Q3?

The -- hey, Steve, this is Jeff. The automotive, it's primarily handlers that would benefit from increase in the automotive business. And those handlers are tri-temp, a little more sophisticated, complicated if you will. And along with that comes a higher gross margin. So they're in line with the corporate gross margins. And I guess I would direct you to the business model then to compare the gross margins at the various revenue levels. So once automotive comes online, completely expects margins to be compliant with the business model.

Great. Thank you. And nice jump in the quarter.

Thank you.

Your next question comes from the line of Brian Chin from Stifel. Your line is now open.

Hi, there. Good morning. Nice execution in the quarter. And thanks for letting us ask a few questions. Maybe the first question here. You talked about a number of design wins in the quarter. I do want to key on the memory wind in particular. The broad memory SAM is not something Cohu has historically targeted. But can you talk about why this engagement is more suited to your technology and whether this could translate into high volume production shipments down the road? Luis Müller: Hi, Brian. Going on to high-performance memory. These are usually stacked up memory layers onto a logic controller. And testing these devices has proven to be similar to testing -- from a handler perspective, similar to testing an application processor on a smartphone, meaning it is similar geometries, complexities, touchdown pitch on the device. And more importantly, they are powered dissipative. The devices are dissipating energy during the test cycle or in other words self-generating heat. And in order to ensure yield and quality of test, the application requires an advanced active thermal control solution. So that's what lands itself well into our platform. Now, truth be said and as I mentioned on the call here, this initial sale is for lab, engineering use application. I mean, we think, you will it will have the opportunity to drive something on the order of $3 million to $4 million a year over the next couple of years. But it's still lab engineering use. And we haven't talked about anything related to volume manufacturing at this point -- volume test.

Okay. Fair enough. So this could be just a situation where, like, if you're looking at HPM 3 and more dies per stack, that probably would be something that would even increase sort of the thermal dissipation kind of requirements, et cetera. Maybe switching gears to 5G, which is clearly a positive influence for the company. Manufacturing companies that reported yesterday, expectations for 5G smartphone shipments are maybe back into sort of the 200 million, 250 million range. Granted it's too early to probably call or say that the broader smartphone market has stabilized yet. But let's say it does next year and the 5G adoption curve remains steep, how fast might you expect the RF semi test TAM to grow next year? Luis Müller: Yes. That's a very interesting question there, Brian. I got to look at the -- two things. One is sort of outside reference. Gartner has some projections for 5G. I don't have it in front of me right now, but it has some projections for 5G RF segment going in a double-digit rate. And I look at just the rollout of 5G this year and the projected unit cell phones that could have 5G technologies next year and probably also more so the increasing content of RFICs in those phones and the increasing frequencies, as higher frequency bands get adopted for millimeter wave. So I think we're looking at something to the tune of 20-plus percent growth rate for RFIC test. And that's talking in unit volumes. And I think you have to compound that a little bit with increasing ASP of the testers and the instruments that go in it.

Okay. That's helpful. Maybe one more quick hit here. Just in terms of the RF content growth in 5G phones, one is that the key rationale why Cohu you may be seeing more relative strength into the back end of the calendar year than some of the broader test suppliers? And then, kind of, not quite related to that, but the PCB test sounds like it's been strong. Can you just remind us what that margin structure is relative to the broader business?

PCB test is about 40% gross margin, very consistent business. Luis Müller: Yes. And just to get back to the first part of the question, you're right on the semi test. I mean our semi test business, outside of handlers and thermal subsystems, right, the handling piece, the tester itself; we're not testing high-end digital devices. So we wouldn't be testing application processes today. And, therefore, we would see the wave naturally later in the cycle, because we're in the RF and the power management ICs, also flat panel display drivers, although, still a smaller portion of the total is one that we expect to continue to grow. And then, as it pertains to PCB test, it really has nothing to do with mobility or smartphones. Our PCB test business is more associated with computing, telecommunications, network infrastructure, essentially larger PCBs than what you would see on a flexible PCB inside a smartphone.

Okay, great. Thank you.

Your next question comes from the line of Sidney Ho from Deutsche Bank. Your line is now open.

Hi. This is Jeffrey Rand on for Sidney. On the auto side of your business, how much of your recovery in this business is tied to more cars being sold versus increased electronics in cars? Luis Müller: Yes. It's really a combination of both, right, because the increasing IC content in vehicles, in essence, will drive an increased demand for test equipment. But at the same time, it can be compounded up if you have an increased unit vehicle sales. I think at this point, where a lot more focused actually is on the technology shift, where we're seeing an increased content of high-end microcontrollers and microprocessors in vehicles for ADAS. We're seeing also an increased number of sensors that actually feed the information to these ADAS devices. And we're seeing an increase in battery management systems for electrification. So since we can't drive the industry or the consumer spending, what we can do is align our investments to the technology shift, so that when automotive is back in full swing and we likely to see that next year, that we're aligned to the technologies that are actually driving the growth for sort of the new ICs that will require different handling equipment than the last generation wave of growth in the semiconductor for autos.

Great. And just as a follow-up. On the inventory front are you seeing any indication that there's an inventory build by your customers, or are the orders being driven by true end demand? Luis Müller: No, we don't see any inventory buildup at our customers. I mean, in fact, the checks we had seen -- everybody seems to announce they're pretty lean and I think this is actually end-demand driven.

Great. Thank you.

Your next question comes from the line of David Duley from Steelhead Securities. Your line is now open.

Thanks for taking my questions. I was wondering if you could comment a little bit further on the display driver business. I think as you put the two companies together Xcerra had won some business in that area. And I was just wondering if it had ramped up or what you can talk about in that area? That's my first question. Luis Müller: Okay. Hi, Dave. Yes, Xcerra has done a good job at designing an architecture to penetrate the display driver market. They got a design win in Taiwan -- customer in Taiwan. We have been working very closely with that customer and expanding that architecture. And that market segment, truth be said, hasn't seen a big ramp since we acquired Xcerra, but we have seen ourselves increased sales in 2019 and 2020, then albeit still smaller numbers than we would have hoped. At the same time, we put more energy into additional design wins. And we have some good traction with customers both in Taiwan and Korea. And so we expect to continue to execute on that, flat panel display driver strategy that was laid out a few years ago. And as the market evolves, as the ramp comes back particularly with OLED -- OLEDs next year, we fully expect to see this business continue to -- will continue to grow for us.

Okay. And then, I think you mentioned in the past and also in your prepared comments, about how 5G requires higher signal integrity in the test and that might help drive higher contact and pin sales. Could you just talk a little bit about, -- do you -- will you expect the attach rate to go up with the 5G rollout? And what sort of market opportunity does that create above and beyond what was seen in 4G? Luis Müller: Yeah. Our contactor attachment rate has been higher in the automotive side, than it has been in the mobile side. With 5G I really see an opportunity to increase the attachment rate -- contact or attachment rate. And this time actually more towards testers on the mobile side. As frequencies go up, you start at 3 or 4 gigahertz and then you push up to 6 gigahertz with FR1 in 5G. And then you push it up to 8.5 gigahertz for WiFi 6. And then it starts going further up to 24 gigahertz and beyond for a millimetre wave. As those frequencies go up, the complexity of maintaining signal fidelity all the way to the device under test grows. And so grows the opportunity for us to sell a complete solution, controlling the entire signal path to the device under test. So yes, 5G in essence, does give us a greater opportunity to increase attachment rates of contactors in the mobility market, which is not where we were strong. We were strong in the automotive market for contactor attachment rate. As far as opportunity size, I don't have a number to pinch at that right now for you, but we're definitely talking sort of tens of millions of dollars of business that could be generated, in the mobile space.

And you have given a number in the past about how much more the 5G would be for overall revenues versus 4G? Could you just remind us, what the incremental TAM of 5G was? However, you phrased that I was just -- if you could just remind us what the incremental number was that you talked about. Luis Müller: Yeah. It was about $120 million of incremental revenue opportunity, with 5G. And this is specifically talking about testers. I'm not talking about handlers or contactors now. So we view that, the 5G RF space would grow, by about $120 million, in a span of two to three years, this being year one right now, 2020. And that applies to all RF front-end ICS meaning power amplifiers, low noise amplifiers, filters, switches, antenna tuners, sort of that space basically the whole signal chain.

Okay. Final thing for me, Jeff historically, I think, you've given us a breakout of systems revenue amongst five or six or seven categories. Could you give us those numbers for the June quarter?

Yeah. What we do is do quarters. And that's in the IR deck. So let me just tell you, with systems. They're 48% of the total orders as Luis mentioned, and that breaks down to -- of the systems piece. 15% is mobility; PCB manufacturing 10%, consumer 9%, automotive 5%, industrial medical 4%, computing and network 3%, and IoT, IoV and optoelectronics is 2%. That totals the 48%, of system orders.

Okay. Thank you.

Your next question comes from the line of Tom Diffely from D.A. Davidson. Your line is now open.

Yeah. Good morning. I guess first question, just on the breakdown of orders you just gave. Are you surprised that computing networking isn't a little stronger right now since there's a lot of effort going on from a capacity point of view? Luis Müller: Hi Tom, it's Luis. I mean, yes or no, there has been strong system orders and computing in the first half of the year. And I think there's some, digestion on installation right now. But computing network represents a substantial portion of our recurring business. And that has remained fairly strong. So if you think in terms of total here we're looking at a couple of percentage point changes in total business in the computing network, because of the fluctuation in systems. So it's pretty common for our customers to go through, spurs of ramp and then digestion for a quarter or sometimes two quarters and then, another spur of ramp, so not too concerned about it.

Okay. Great. And then Jeff, some questions on the operating expenses. Is the temporary cost reduction measures? Are those time based for, a couple of quarters, or are those going to remain in place while revenues are at current levels, or how do you look at that going forward?

Hey, Tom yeah. So they remain in place as I had mentioned, the main item that we're looking for is an improvement in business conditions particularly orders to improve. We anticipate -- it's likely that these temporary cost reductions will be in place until next one -- excuse me, Q1 of next year we could potentially reverse it sooner. Just again depends on, business conditions.

Okay. And then -- that's helpful. Is there anything that you've learned or been able to adopt during, kind of the stay-at-home environment we're in that will impact or reduce cost structures going forward?

Yeah. Certainly Tom, I think that certain areas that have been high cost areas is, travel. I think we're going to look at that a little bit differently. As you know, some of these investor conferences that are done virtually work out pretty well. So I think, travel across the board is significant spend and that's an area that we're going to look at a little bit differently, moving forward. I think there were a few others that we'll take a look at as well, but that's one that really sticks out.

Okay. Great. And then I guess, just a final question here. Luis, when you look at the contactor business and some of the share gains there, which end market, are driving that today? And what are the biggest opportunities from an end market point of view for that segment? Luis Müller: So if I look in total revenue, the contactor revenue is probably going to grow fastest in the coming quarters on tri-temp handling test applications in automotive and industrial. And that is just a sheer current attachment rates with tri-temp handlers and the likely resurgence of the automotive market, nothing necessarily driven by actions on our side. Secondly and I think that's the one that we spend more of the energy is where can we get a design win? Where can we increase contactor attachment to our products? And where the energy is going today is both in the RF space because of the 5G higher frequencies as I described before in a prior question as well as in computing. And in computing simply because of our large presence with thermal technology and handlers in the computing space, we would like to bring in new solutions and new technologies to that segment as well. So those would be more of the actions that we're going to take. But if you will the revenue is likely to outpace everything else because of an eventual comeback here in the automotive market.

Okay. I appreciate the color. And thanks for your time this morning. Luis Müller: Thank you Tom.

Our next question comes from the line of Craig Ellis from B. Riley. Your line is now open.

Yeah, thanks for taking the questions, and congratulations on the company execution guys. Jeff, I wanted to just go back to some of your comments regarding the third quarter. I missed what you said about gross margins. Can you repeat what the gross margins to us please?

We gave a range of 41% to 44%.

Okay. And so the midpoint would be down, I believe quarter-on-quarter. And just given the linearity of the Asian manufacturing increase through the second quarter, why wouldn't we see with the full quarter's benefit of that a flattish gross margin quarter-on-quarter?

Actually Craig the midpoint is 42.5% and the midpoint revenue is $140 million. So margin's up a bit quarter-over-quarter.

Okay, got it.

And that does -- and so that does take into consideration full operations in Asia.

Okay, all right. Thank you. And then a longer term question Luis, the business is building a nice space here with better than previously expected RF in the near-term and potential for flattish sales in the calendar fourth quarter. If we were to look out to the third quarter of 2021 from where we are today, can you just rank the incremental growth drivers in the business from largest to smallest? What are the top three or four things that are going to drive year-on-year growth? And any color on magnitude would be real helpful. Just to understand the longer term outlook that the company may be seeing? Thank you. Luis Müller: Okay. Hi, Craig. So I think there will be a pause here on the number one. I would have a hard time to say, which one is one or two. But the two top ones would be a resurgence of demand for test handlers and associated with that test contactors because the attachment rate in the automotive segment -- automotive has been substantially depressed here for the last couple of quarters. I think it was actually last quarter and not a couple of quarters. It was coming back up in Q1 and then it got hit hard with the COVID-19 pandemic and the shutdown of auto factories worldwide. So I think automotive return and then the technology shift to ADAS and electrification will be a substantial driver for handler and contactor sales. But equally as important and frankly I don't know, which one takes the lead on this one is going to be -- continue to be 5G and 5G drive for incremental testers and incremental ASPs or higher ASPs on these testers for higher frequency semiconductor RF device test. And then along with that we'll go to…

That’s helpful. Thanks very much guys. Luis Müller: Thank you, Craig

Your next question comes from the line of Christian Schwab from Craig-Hallum. Your line is now open.

Great, thanks. I just have a quick follow-up to the previous question. If the automotive market does normalize and come back and 5G adoption continues to accelerate as far as smartphone percentage of shipments then is it fair to assume that we should probably at some point be operating in the business model of $170 million to $190 million a quarter next year potentially for a meaningful portion of it depending upon automotive sales?

Yeah. Christian this is Jeff. Yeah I think you're absolutely right. Hard to say exactly, which quarter that is but it's $170 million to $190 million, I think is a reasonable expectation.

Excellent. No other questions. Congrats on a good quarter.

Thanks, Christian.

[Operator Instructions] And there are no further questions at this time. Please continue.

Okay. I just want to say thank you for joining today's call and have a nice day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.